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Will the Medibank share price bounce back in 2016?

Medibank Private Ltd (ASX: MPL) has seen its share price bounce around since listing in November 2014, between $1.99 and $2.59. Shares are currently trading around $2.11.

The Medibank share price has dropped nearly 10% in the past month, compared to the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) fall of around 1.4%.

Earlier this week, the federal government announced cuts to spending on pathology and diagnostic imaging, which could see health insurers like Medibank and NIB Holdings Limited (ASX: NHF) forced to pick up more of the tab for these services.

It’s also clear the government is looking for more ways to cut spending on health care, perhaps pushing more of the costs onto the public health insurance sector as well as providers of health care.

More recently, Medibank has been pushing back on hospital operators to cover more of patient’s expenses. That included forcing Australia’s second-largest operator, Healthscope Ltd (ASX: HSO) to cover the cost of patients who are injured or become sick in its hospitals for two years. Medibank will refuse to honour claims of patients returning to hospital within 28 days of surgery due to complications.

That should result in lower premiums for patients insured by Medibank, which is hoping to lure back price-conscious customers after a series of rises on health insurance premiums forced them to downgrade their cover.

Medibank’s current agreement with Australia’s largest private hospital operator, Ramsay Health Care Limited (ASX: RHC) expires in August 2016, and it too could be forced to accept similar terms as Healthscope.

Another factor complicating the outlook is news that the current CEO George Savvides will step down from the health insurer in March 2016 – 15 months earlier than originally planned, and a new CEO has yet to be announced.

Interestingly, two directors, Christine O’Reilly and Elizabeth Alexander recently bought shares on market – suggesting they are confident about Medibank’s future.

Foolish takeaway

With plenty of moving parts and factors that can swing revenues and earnings, Medibank is trading on a trailing P/E ratio of around 20.6x. That’s reasonable for a health insurer with solid market share and pricing power, but there are better opportunities out there.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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